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Reverse payment settlements in the pharmaceutical industry after Actavis

In Actavis, the Supreme Court held that reverse payment agreements should be reviewed by the rule-of-reason antitrust standard.

Reverse payment settlements involving pay-for-delay payments involve a pioneer drug company paying the generic drug manufacturer to delay the entry of the generic version of the pioneer’s drug in the market, usually after the generic manufacturer has filed an ANDA with a paragraph IV certification and litigation has begun. The settlements that invite increased scrutiny of the Federal Trade Commission (FTC) usually involve payments from the pioneer to the generic which exceed what the generic would have obtained even if the generic had prevailed in the litigation. The FTC’s usual concern is that by entering into these settlements the pioneer gets to keep its monopoly profit margins as a result of the cheaper generic’s delayed entry in the market, and in return gives a percentage of these profits to the generic. This potentially leads to a win-win situation for both the pioneer and the generic at a cost to consumers who then have to pay for the higher priced branded drug manufactured by the pioneer which has no competition from a lower priced generic drug.

Prior to the Supreme Court’s decision in Federal Trade Commission v. Actavis Inc., Circuits were split on this issue. The 2nd, 11th and Federal Circuits viewed these settlements as presumptively legal. They applied the scope-of-the-patent test and held that a violation would occur if the settlement’s effect exceeded the scope of the patent — for example when the generic agreed to stay out of the market past the patent’s expiration date, if the patent was obtained by fraud, if the patent infringement litigation itself was a sham, or if the agreement covered unrelated or obviously non-infringing products. The 3rd and 6th Circuits viewed these settlements as presumptively anticompetitive.

In Actavis, the Supreme Court declined to hold these agreements presumptively anticompetitive as advocated by the FTC or apply the scope-of-the-patent test, but held that such agreements should be reviewed by the rule-of-reason antitrust standard, and also held that courts should evaluate the procompetitive and anticompetitive effects of these agreements on a case by case basis. The Actavis Court further held that a “large” and unexplained payment was itself indicative that the patent was weak and the pioneer had thus an underlying motive to pay the generic to stay out of the market as the pioneer presumably did not want to risk having the patent invalidated in litigation. As the Court noted in Actavis, an unusually large reverse settlement payment could “provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.” Where a settlement is a good option in litigation, the Court suggested that parties can “settle in other ways, for example, by allowing the generic manufacturer to enter the patentee’s market prior to the patent’s expiration, without the patentee paying the challenger to stay out prior to that point.”

Another majorconcern of the FTC is that pioneers may use agreements not to launch or market their own authorized-generic drugs to compensate generic competitors for delaying entry into the market. Post Actavis, the FTC filed Federal Trade Commission v. Abbvie Inc., et. al. The complaint alleges that the pioneers entered into an anticompetitive agreement with the generics in the ANDA litigation and also that the pioneers filed sham litigation against the defendants to trigger the automatic 30-month stay on FDA’s authority to approve the defendants’ products.

There is also proposed legislation to further discourage pharmaceutical companies to enter into reverse settlement agreements. The Preserve Access to Affordable Generics Act seeks to declare these settlements as presumptively anticompetitive. The Fair and Immediate Release of Generic Drugs Act seeks to reduce the incentive for reverse settlement agreements by permitting a second generic company to bring its generic to the market if the first generic company makes a reverse settlement agreement with the pioneer in ANDA litigation.

An important issue which remains uncertain is whether reverse settlements have to be monetary under Actavis. Courts which take the view that even non-monetary payments are unlawful will further have to decide other issues such as whether reverse payments include (a) release of liability in an unrelated litigation; (b) a pioneer agreeing not to market an authorized-generic drug; and (c) granting rights in foreign markets or payments made overseas, and also whether determining a payment is large and unexplained is part of the rule-of-reason analysis or is a preliminary requirement before reaching that analysis.

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